Super SGP coming – ECB: “A stronger and stricter fiscal framework is required”
The ECB is released a policy paper entitled "A Fiscal Compact for a Stronger Economic and Monetary Union" I reckon in response to the turmoil surrounding periphery governments missing their targets. What caught my eye is this:
the SGP did not succeed in securing fiscal discipline. Good economic times before the crisis were not used to achieve sustainable budgetary positions. Revenue windfalls were spent instead of being used to foster fiscal consolidation, violations of the de?cit criterion were only slowly corrected and the debt criterion was largely ignored. The most important reason was that the SGP was only implemented half-heartedly as enforcement of the fiscal rules through peer pressure was weak.
[…]
The sovereign debt crisis has demonstrated that unsustainable macroeconomic, financial and fiscal policies of any EMU member amplify each other and affect other euro area countries via negative spillover effects. This, in turn, endangers the financial stability of the euro area as a whole. As a consequence, the ECB repeatedly demanded a “quantum leap” in the EU economic governance framework to ensure the stability and smooth functioning of EMU
Translation: when the Lisbon Treaty is reformed, we suggest adding teeth to the fiscal compact in the form of oversight and penalties for fiscal free riders under the threat of expulsion from the euro zone. This is the policy response that is coming – and what is meant in Germany by ‘fiscal union’.
The long-held view in German policy circles has been that the European sovereign debt crisis is a clear indication that the stability and growth pact (SGP) was not sufficiently robust in addressing fiscal discipline. The goal for two years has been to eventually make changes to European treaties to create a Super SGP that includes penalties, oversight and now potentially expulsion for serial violators. Expect to see Germany push for this policy to be formalised as part of the growth pact compromise between Hollande and Merkel.
This is code for the ability to eject the periphery. Though I am beginning to doubt whether the euro will survive the ejections. It is a short term measure. By ejecting the periphery, the euro would become much stronger in the short term. Though it would make euro denominated loans to the periphery even more unaffordable and so accelerate their default. That would transfer big bank losses to the core. Which would require state bailouts and then trigger ejections of core nations as it trashes the sovereign balance sheet.